Binary equation trading involves the use of mathematical models to determine the price at which traders buy and sell securities to achieve maximum profit. Foreign exchange trading, or FOREX, involves the buying and selling of foreign currencies. FOREX traders use binary equation strategies to determine the amounts of their trades -- not necessarily the types of currency involved in those trades. Traders can use binary equation strategies to create excellent opportunities to maximize profits and minimize losses in the volatile FOREX markets.
Benefits of Binary Equation Strategies
The mathematical models used in the binary equation strategy are based on both the current exchange rates and on the magnitude of the upward or downward trends in the currency markets. The binary equation strategy lets traders use short-term data to anticipate the movement of currency markets. It also allows the trader to maintain or improve the liquidity of his position. The trader can purchase a currency at a lower-valued exchange rate, then wait for the specific moment when the exchange rate increases. Binary equations are designed to help traders predict the right time to sell the acquired foreign currency.
How Currency Pairs Work
The basis of FOREX trading lies in the exchange rates between currency pairs. The FOREX market allows traders to bet on the exchange rates between the U.S. dollar and the British pound, the European Union Euro and the Japanese Yen, or any other pairing of major world currencies. Traders can use the binary equation strategy to calculate the price of the currencies along with the direction of the exchange rates to determine whether to buy or sell a specific currency pair.
The 18th Century French mathematician Jean le Rond d'Alembert developed a binary equation strategy that involved doubling the amount of a bet after a loss. The idea behind this method, later known in FOREX markets as a "Martingale strategy," is that, if the first trade leads to a $100 loss, and the second trade leads to a $200 loss, a $400 trade that makes a profit will recover the previous two losses, plus $100 profit. (400-200-100=100). The downside to this strategy is that the trader on a losing streak will run out of money before making the profitable trade that will recover the losses.
Binary options are FOREX options contracts in which a trader receives a set amount, typically $100, if and when current prices get to the target price of a binary option. The option must reach this target price, also known as the strike price, before the option expires. This binary equation method uses the desired profit, the amount of premium or contract size, the total number of bets and the success rate or percentage of winning bets to determine the winning strategy.